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Principal Risks

The materialisation of the principal risks could have an adverse effect on the Group’s results or financial condition. If more than one of these risks occur, the combined overall effect of such events may be compounded.

The chart below shows management’s assessment of material risks. Various strategies are employed to reduce these inherent risks to an acceptable level. These are summarised in the tables at the bottom of this page.

The effectiveness of these mitigation strategies can change over time, for example with the acquisition or disposal of businesses. Some of these risks remain beyond the direct control of management. The risk management programme, including risk assessments, can therefore only provide reasonable but not absolute assurance that risks are managed to an acceptable level.

As part of the ongoing risk management process, the Board and the Group’s management have identified and assessed emerging risks, and worked with stakeholders to evaluate the impact of such risks to the business. Although none of these risks are deemed to be significant and are consequently not listed as one of the Group’s principal risks, they are tracked in case they evolve to become more significant. One such risk relates to the geographical composition of the Group’s shareholder register. If shareholders resident in the USA exceed 50 per cent of the total, the Group would be subject to additional US regulatory requirements, most notably SEC registration and reporting and Sarbanes Oxley compliance. A detailed beneficial ownership study is conducted on an annual basis to ensure compliance.

Another emerging risk is climate change and the impact of this on our business. During the year, the Group commenced a project to get more clarity on the risk climate changes presents. During the year, the Group has convened subject matter experts from across our businesses to examine the specific risks and opportunities to the Group posed by climate change.

The Group faces many other risks which, although important and subject to regular review, have been assessed as less significant and are not listed here. These include, for example, natural catastrophe and business interruption risks and certain financial risks.

Risks to the drivers of profitable growth

A: New competitors and technology

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High

 

Trend
Higher

 

Wholesale and distribution businesses in other industry sectors have been disrupted by the arrival of new competitors with lower cost transactional business models or new technologies to aggregate demand away from incumbents.

 

The Board is attuned to both the risks and opportunities presented by these changes and is actively engaged as the Group takes action to respond.

 

Ferguson Ventures extended its network in the start-up community, increasing early visibility to new competitors and potential disruption. Partnerships and investments were made in a range of technology companies to also include industry focused venture capital funds. New business model opportunities were identified and progressed, leveraging service design and rapid prototype development in the Ferguson Ventures Innovation Lab, which is focused on exploring areas of innovation and disruption by evaluating consumer and industry evolution in technology and service design.

 

In addition, Ferguson accelerated delivery of its omnichannel strategy to meet constantly changing customer demands and emerging digital needs as the rate of customer adoption of e-commerce tools accelerated due to COVID-19.

The Group develops and invests in new business models, including e-commerce, to respond to changing customer and consumer needs. This will allow the Group to accelerate the time to market for new revenue streams and gain insight on new disruptive technologies and trends.

The Group remains vigilant to the threats and opportunities in this space. The development of new business models in our marketplace is closely evaluated – both for investment potential and threats.

B: Market conditions

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level

High

 

Trend

No change

 

This risk relates to the Group’s exposure to short-term macroeconomic conditions and market cycles in our sector (i.e. periodic market downturns).

 

Some of the factors driving market growth are beyond the Group’s control and are difficult to forecast.

 

The Group continues to closely monitor the impact of COVID-19 and take prudent steps to mitigate any potential impacts to the successful operation of our business.

 

The Group is also monitoring for general recessionary impacts in the medium term that may result from the government-mandated shutdowns that occurred during spring 2020.

This risk is unchanged, notwithstanding the uncertainty caused by COVID-19.

 

The Group has maintained a strong balance sheet throughout the year and other measures have been taken to manage the cost base in line with forecast growth.

 

The Group has again tested its financial forecasts, including cash flow projections, against the impact of a severe market downturn.

The Group cannot control market conditions but believes it has effective measures in place to respond to changes. Ferguson continues to reinforce existing measures in place, including:

 

– the development of our business model;

 

– cost control, pricing and gross margin management initiatives, including a focus on customer service and productivity improvement;

 

– resource allocation processes; and

 

– capital expenditure controls and procedures.

 

The Group remains prepared to implement appropriate mitigation strategies to minimize any potential business disruption from COVID-19.

C: Pressure on margins

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High

 

Trend
Higher

 

The Group’s ability to maintain attractive profit margins can be affected by a range of factors, including some that are beyond the Group’s control. These include levels of demand and competition in our markets, the arrival of new competitors with new business models, the flexibility of the Group’s cost base, changes in the cost and availability of commodities or goods purchased, the imposition of new or increased governmental tariffs on international sources of supply, customer or supplier consolidation or manufacturers shipping directly to customers.

 

There is a risk that the Group may not identify or respond effectively to changes in these factors. If it fails to do so, the amount of profit generated by the Group could be significantly reduced.

Pressure on margins increased during the year, primarily due to levels of competition and adverse mix challenges arising from temporary closure of the branch and showroom networks as a result of COVID-19.

 

In response, the Group has continued to manage its cost base in line with changes in expected growth rates. Business unit performance, including margins achieved, were monitored on a monthly basis throughout the year.

 

Ongoing gross margin was in line with last year.

The Group’s strategy for tackling this issue remains unchanged. This includes continuous improvements in customer service, product availability and inventory management; strict pricing controls managed with proper data and insight; and effective maintenance and management of vendor rebate programs. Revenues from e-commerce, own brand, and other growth sectors continue to grow and the Group has made acquisitions in these areas during 2019/20, while we paused further merger and acquisition activity due to market uncertainty caused by COVID-19.

 

The performance of each business unit is closely monitored and corrective action taken when appropriate.

 

Resource allocation processes invest capital in those businesses capable of generating the best returns.

D: Information technology ("IT")

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
High

 

Trend
No change

 

The Group has a clearly defined global technology strategy and roadmap. Technology systems and data are fundamental to the future growth and success of the Group. Information Technology risks are categorized as strategic and operational.

 

Strategic risks are threats that could prevent execution of the IT strategic plan such as inadequate leadership, poor allocation/management of resources and/or poor execution of the organizational change of management necessary to adopt and apply new business processes.

 

Operational risks include business disruption resulting from system failures, fraud or criminal activity. This includes security threats and/or failures in the ability of the organization to operate, recover and restore operations after such disruptions. While cyber security incidents encountered by the Group to date have resulted in minimal impact, this risk continues to persist and evolve, and was amplified by the increase in frequency and intensity of cyberattacks since the emergence of COVID-19 and the related transition to remote work for many of our associates.

IT risks have remained material and are being closely monitored as we implement the clearly defined global technology strategy and roadmap. Those risks include the potential for schedule delays, cost overruns, functionality deferrals and change management disruptions on operations.

 

Under the management of the Chief Information Officer, the Group has continued to make substantive progress in implementing its technology strategy and roadmap, including progressing significant upgrades to its enterprise-wide resource planning systems and other enterprisewide IT resources.

 

IT General Controls continue to be independently tested by Internal Audit and findings reported to the Audit Committee. Briefings on the status of the Group’s IT strategy, and its implementation have been regularly provided to the Board, the Audit Committee and the Executive Committee throughout the year.

 

Regular Board update checkpoints have been established to provide monitoring and oversight of execution of the IT strategic plan.

Business leadership continues to execute a comprehensive change management program designed to transition current business practices and norms to adopt new business capabilities.

 

Business Technology and Omnichannel Centers of Excellence are in place to drive organizational discipline around the prioritization of business projects to ensure alignment with Ferguson’s strategic framework.

 

Management continues to execute a rolling three‑year roadmap of investments in processes, resources and technical defenses necessary to continuously address emerging cybersecurity threats, and is extending enhancements to the Group’s control environment to other parts of the Group’s systems.

Group-level compliance processes and insurance coverage, including data protection and cyber liability, are in place.

 

Disaster recovery systems, secondary data centers, cloud redundancy and resiliency platforms, resources and processes have been implemented to ensure business critical systems are recoverable in the event of a major disaster. Testing of critical infrastructure and application systems is in place and has been consistently executed across the Group.

E: Health and safety

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
Medium

 

Trend
Lower

 

The nature of Ferguson’s operations can expose its associates, contractors, customers, suppliers and other individuals to health and safety risks.

 

Certain products that we sell pose health and safety risks.

 

Health and safety incidents can lead to loss of life or severe injuries.

 

The Group continues to closely monitor the impact of COVID-19 and to take prudent steps to mitigate any potential impacts to the health and safety of our associates or to the successful operation of our business.

The Group’s strategic plan remains focused on the elimination and control of risks causing disabling injuries, improving our safety culture and closing the safety, health and environmental knowledge gap among our associates. The hiring and deploying of health and safety professionals in the field provides businesses with technical resources to more effectively mitigate risk. Our efforts in these areas have improved the overall performance of the Group, notwithstanding the impact of COVID-19.

Health and safety is a fundamental value in our organization. Our leaders have specific roles to play and are required to actively engage with our associates in ensuring a healthier and safer workplace. Our performance is reported and discussed at both the Executive Committee and Board meetings.

 

The Group maintains a health and safety policy, with detailed minimum standards, and standard operating procedures which sets out requirements for all businesses. Branches are audited against these standards and businesses continue to implement fundamental changes to transform our culture.

 

We continue to follow the COVID-19 guidance of the World Health Organization and other governmental health agencies, including with respect to travel restrictions.

F: Regulations

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
Medium

 

Trend
No change

 

The Group’s operations are affected by various statutes, regulations and standards in the countries and markets in which it operates. The amount of such regulation and the penalties can vary.

 

While the Group is not engaged in a highly regulated industry, it is subject to the laws governing businesses generally, including laws relating to competition, product safety, data protection, labor and employment practices, accounting and tax standards, international trade, fraud, bribery and corruption, land usage, the environment, health and safety, transportation and other matters.

 

Violations of certain laws and regulations may result in significant fines and penalties and damage to the Group’s reputation.

 

There has been no major change in the level of regulation applying to the Group this year. Following the adoption of the California Consumer Privacy Act, the procedures and controls implemented by the relevant businesses within the Group to ensure compliance were reviewed and improvement measures put in place.

 

Awareness training of the Group’s Code of Conduct was deployed to all associates during the year. The Code sets out the Group’s values and commitment to strict compliance with the various laws and regulations that apply wherever the Group operates.

 

The Group monitors the law across its markets to ensure the effects of changes are minimized and the Group complies with all applicable laws.

 

The Group aligns company-wide policies and procedures with its key compliance requirements and monitors their implementation.

 

Briefings and awareness training on key compliance topics and requirements, including harassment and discrimination, data privacy and security and gifts and entertainment were undertaken.

G: Talent management and retention

 

Definition and impact

Changes during the year

Mitigation

Inherent risk level
Medium

 

Trend
No change

 

As the Group develops new business models and new ways of working, it needs to develop suitable skillsets within the organization.

 

Furthermore, as the Group continues to execute a number of strategic change programs, it is important that existing skillsets and talent are retained and that associates remain engaged through recognition, training and communication.

 

Failure to do so could delay the execution of strategic change programs, result in a loss of “corporate memory” and reduce the Group’s supply of future leaders.

There has been no material change in the level of associate turnover during the year. Reductions in force implemented as part of the steps taken to manage our cost base given the uncertainty of COVID-19 were offset by lower voluntary attrition.

 

On May 26, 2020, the Group announced that Mike Powell, the Group CFO, had resigned and had committed to assisting

with an orderly transition. The new Group CFO is Bill Brundage and is based at the Group’s Newport News, Virginia headquarters in the USA. 

 

Talent management procedures were reviewed during the year.

Associate meetings with our Employee Engagement Director of the Board were held and feedback was reported back to

the Board.

 

 

All of the Group’s businesses have established performance management and succession planning procedures.

 

Reward packages for associates are designed to attract and retain the best talent.

 

A new robust individual development planning process for high-potential successors from the talent review process is aligned with our organizational strategy.

 

The Group continues to invest in associate development and engagement.